HSBC’s Daniel Smith and Paul Bloxham noted that prices for coal have been on a downward spiral since 2011.
Thermal coal prices have fallen steadily and are now a little over 50% below those levels, at $US56 per tonne, while coking coal prices have fallen by 65% since early 2011 and 16% over the past year.
Coal has not only been hit by oversupply, but growth in demand has slowed as preferences shift towards cleaner forms of energy, just as natural gas and renewables.
In particular, China has implemented restrictions on coal imports, as well as domestic production.
These restrictions partly drove an estimated 11% fall in China’s coal imports in 2014 compared to 2013.
Despite these measures, China’s coal inventories remain elevated.
Oversupply isn’t a problem that’s going away either and HSBC says things will get much worse for thermal coal before they have a shot at getting better.
New supply continues to come into the market and producers have so far shown limited appetite to restrict production in an effort to support prices.
At the current price of $US55-60 a tonne, around half of global capacity may already be operating at a loss, with a number of Australian mines likely to be running at a loss.
Take-or-pay transport contracts, through which a number of the large coal miners have locked in transport volumes, mean that mine closures have been delayed as companies seek to cover the fixed costs associated with these contracts.
In the absence of price rises, however, HSBC said it is likely that producers will have to scale back output at some point, but until that happens prices will remain depressed.
The good news for coal producers is that, while many countries, especially in the developed world, are increasingly turning to cleaner sources of energy to tackle with pollution and climate change, coal is likely to remain important to meeting new energy demands in emerging economies, particularly India.
The Australian Department of Industry and Science predicts that, even with strong growth in domestic production, India’s coal imports are forecast to grow by an average annual rate of 7% between now and 2020.
Over the medium term, the removal of high-cost production and continued growth in demand from emerging economies may support prices at levels where they are today, although prices are likely to remain weak in the near term and are unlikely to return to the high levels reached in the late 2000s.
Coking coal remains more profitable than thermal coal, but at $US112/tonne around 15% of global production could still be operating at a loss.
Unlike thermal coal, producers are cutting output, with around 2% of capacity (25 million tonnes) closed last year, although at the same time demand softened as Chinese growth slowed and the construction sector saw lower activity levels.
One offsetting factor, again, was a strong lift in import demand from India.
Indian demand and Chinese steel production are expect to maintain key buyers of coking coal, although increasing demand is likely to grow at a much slower rate than the past decade.
Given steadily increasing demand and some signs of a slowdown in supply, the coking coal market is likely to return to balance sooner than the market for thermal coal.
